HOKA's Global Expansion And Innovative Launches Promise Robust Revenue Growth

Key Takeaways

• Expansion and partnerships in new markets, alongside launching new styles like the Mach 6 and Bondi update, signal strong potential for revenue growth.
  
• Investment in marketing and talent to support growth, coupled with a 33% increase in direct-to-consumer revenue, underscores an aggressive strategy for long-term earnings.
  
• Reliance on new HOKA launches, rising freight costs, ambitious revenue targets, increasing SG&A expenses, and a promotional environment pose risks to margins and profitability.

Catalysts

Designs, markets, and distributes footwear, apparel, and accessories for casual lifestyle use and high-performance activities in the United States and internationally.

• Expansion into new strategic doors and shelf space gains with key partners are poised to drive HOKA's wholesale growth, indicating potential revenue increases primarily in the U.S. and international regions. This expansion includes partnerships with entities like DSG, JD, Intersport, Foot Locker, top sport in China, and Sport Chek in Canada, indicating a broader market reach and increased demand for HOKA products.
  
• The successful launch and strong sell-through of new HOKA styles, such as the Mach 6, Gaviota, Zirra, and the anticipation for the Bondi update in Q4, highlight the brand's ability to continuously innovate and meet consumer preferences, potentially leading to sustained revenue growth from product diversification.
  
• The drive towards maintaining a balanced portfolio across HOKA franchises, not relying solely on cornerstone styles like Clifton and Bondi but also pushing emerging and newly launched styles, suggests a strategic approach to revenue growth by widening the brand's appeal and consumer base.
  
• Deckers' focus on direct-to-consumer (DTC) growth, coupled with HOKA's impressive 33% increase in DTC revenue versus last year, showcases the brand's solid direct engagement with consumers and loyalty building, which is critical for higher margin sales and sustained revenue growth.
  
• Increased investment in marketing and talent to support key business growth areas, as evidenced by updated SG&A guidance, signals an aggressive approach to building brand awareness and market share. This strategic decision is aimed at enhancing long-term revenue and earnings growth despite short-term cost increases.

Assumptions

• Analysts are assuming Deckers Outdoor's revenue will grow by 11.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 18.3% today to 18.2% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $45.39) by about August 2027, up from $811.6 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $959.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.3x on those 2027 earnings, up from 26.4x today. This future PE is greater than the current PE for the US Luxury industry at 15.7x.
• Analysts expect the number of shares outstanding to decline by 2.77% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.9%, as per the Simply Wall St company report.

Risks

• The reliance on new product launches for driving growth, particularly in the HOKA brand, carries execution and market acceptance risks that could affect revenue and earnings.
  
• The expected increase in freight costs, turning from an 80 basis points benefit in Q1 to a projected 80 basis points headwind for the rest of the fiscal year, could negatively impact gross margins.
  
• The ambitious revenue targets partially rely on expanding distribution and gaining shelf space in competitive markets, which entails significant execution risk that could impact revenue growth.
  
• Higher SG&A expenses driven by investments in marketing and brand awareness to support long-term growth may pressure net margins if revenue growth does not meet expectations.
  
• The anticipation of a more promotional environment going forward may require increased spending on promotions and discounts, potentially reducing gross margins and impacting overall profitability.

Valuation

• The analysts have a consensus price target of $1081.69 for Deckers Outdoor based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $1350.0, and the most bearish reporting a price target of just $887.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $6.1 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 27.3x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of $843.28, the analyst's price target of $1081.69 is 22.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.